AM Markets: Weather Sends Spring Wheat Premium Soaring Anew

(Agrimoney) – Spring wheat futures, after resting for a couple of months, are showing a clean pair of heels again to their winter wheat peers.

If the start of a new month is, by repute, meant to bring new money into grain markets, that trend was not working well for Chicago soft red winter wheat, the world benchmark, in the opening trades of December.

Chicago’s best-traded March 2017 lot was, as of 10:00 UK time (04:00 Chicago time), standing a modest 0.1% higher at $4.03 ¼ a bushel, and earlier hit a fresh contract low of $4.00 ¼ a bushel.

By contrast, the Minneapolis-traded spring wheat contract for March was up 0.7% at $5.38 a bushel, among its highest levels in four months, and lifting its premium over its Chicago peer to a contract high of $1.34 ¾ a bushel.

That’s up some 40% in six sessions, and a multiple of the $0.25 ½ a bushel the premium touched five months ago, March basis.

Diverging supplies

The growing discount reflects largely the global trend of wheat production this year, of huge, but low quality, crops.

While spring wheat, with its higher protein level than winter wheat, tends to earn premium, but that is proving especially so this season.

In the US, this trend is being supercharged by divergent supply trends, after a drop in spring wheat output this year, contrasting with rising output of soft red winter wheat and (mid-protein) Kansas City-traded hard red winter wheat.

While stocks of soft red winter wheat are seen soaring by 32% to 588.3m bushels over 2016-17, and hard red winter wheat inventories by 17.2% to 1.14bn bushels, those of hard red spring wheat are pegged ending the season at 210.1m tonnes, a drop of 23%.

‘Two surprises’

But fresh factors this week have added extra vim to spring wheat, including the huge demand for the huge deliveries of 540 lots delivered against the expiring December Minneapolis contract on Wednesday, first notice day (ie kicking off the expiry process, when futures contracts gain physical obligations).

“The two surprises were huge (maximum actually) deliveries in both Minneapolis wheat and oats,” said Tregg Cronin at North Dakota-based Halo Commodity Company.

“Three players delivered a total of 540 contracts [in spring wheat], which were stopped almost entirely by the house account” of trader CHS.

’18-24 inches of snow’

Furthermore, weather has exaggerated the divergence too, with winter storms in the northern US, spring wheat country, speaking of potential logistical hiccups

“As of Wednesday afternoon, amounts of 18-24 inches of snow may have fallen across the US northern Great Plains,” said Terry Reilly at Chicago-based broker Futures International.

“Livestock stress is apparent,” a factor which, with along with higher daily beef prices, indeed helped Chicago live cattle futures for December gained 1.7% to 110.75 cents a pound in the last session.

‘Just what the agronomist ordered’

By contrast, the potential stretch of the precipitation further south into [largely hard red] winter wheat country is seen as beneficial for newly-planted seedlings which have been grappling with drought in many areas.

“Forecasters now expect snow to fall on the dry areas of the US winter wheat region – just what the agronomist ordered,” said Tobin Gorey at Commonwealth Bank of Australia.

“If this forecast event is realised then worries about poorly-established crops will be off our watchlist.”

Agritel said that hard red winter wheat futures were being depressed by the “arrival of rains in a few dry production areas, while in Minneapolis, high protein wheat was up due to the current global shortage for this type of wheat”.

The Kansas City hard red winter wheat contract for March was faring a little better than its Chicago peer, but not by much, adding 0.2% to $4.11 ¼ a bushel.

The Kansas City vs Chicago spread, at some $0.08 per bushel March basis, has settled into something of a trading range, and found a ceiling at $0.14 a bushel both last month and in September.

Oil market impact

Perhaps the silver lining to the cloud of low prices for winter wheat bulls is the potential for the grain to pick-up extra demand at cheap levels.

And indeed the spread of Chicago wheat to corn, a major rival in livestock feed, has slumped lower, earlier touching a fresh contract low March basis of $0.51 ½ a bushel.

Corn futures for March stood 0.4% higher at $3.38 a bushel, finding some, although not huge, support from higher prices of oil, which in turn boost price prospects for crops used in making biofuels.

(This when US stocks of ethanol, made in the US mainly from corn, are at their lowest in more than a year, at 18.4m barrels.)

That said, Brent crude managed to gain only further 0.4% to $52.06 a barrel.

‘Origin shift’

The impact of the oil price surge on vegetable oil markets has also been somewhat muted, with palm oil for February adding a modest 0.4% to 3,085 ringgit a tonne in Kuala Lumpur, while Chicago soyoilfor January gained 0.2% to 37.05 cents a pound.

(Vegetable oils are the raw materials for biodiesel.)

Soybeans themselves actually fared better, up 0.4% at $10.36 ¾ a bushel for January delivery, looking for their first winning session in three after a tumble blamed on ideas of demand switching to South America, where the start of harvest is on the horizon in Brazil.

“A higher greenback is no friend to the US export programme which will soon be under pressure from larger South American supplies,” CBA’s Tobin Gorey said.

“Some possible early warning signs of that origin shift have begun to crop up.  Brazilian traders have become much more active in their forward sales as they take advantage of the tumble in the real and investor‑inflated rally in oilseed markets.”

“And, while the US did announce a large sale of soybeans to China on Wednesday, it was the first “big sale” we’ve seen since last Monday.

Data later

On the subject of US exports, US Department of Agriculture data later expected to show export sales of 1.0m-1.40m tonnes of soybeans last week, below the figure of 1.90m tonnes the week before although still a strong figure.

Corn export sales are expected at 900,000-1.20m tonnes, down from 1.69m tonnes the previous week.

Wheat export sales are forecast a 300,000-500,000 tonnes, down from 712,451 tonnes last time.